Late last year, Brazil enacted a new competition law that promised to significantly modify its existing competition regime and dramatically change the landscape for companies involved in mergers or acquisitions that satisfy Brazil’s new pre-merger notification thresholds. The new Brazilian Competition Act (the “Act” or “law”)1 took effect on May 29, 2012, and ushered in important revisions to Brazil’s pre-merger review program. These revisions include the introduction of (1) a suspensory regime, (2) new notification thresholds, (3) a lengthy review period and (4) detailed notification forms. Unlike the previous system that involved multiple agencies, the new pre-merger control law will be administered exclusively by the Administrative Council for Economic Defense (CADE). This advisory briefly summarizes the key changes and explores the practical effects this law will have on transactions that require clearance under Brazil’s new law. These changes will be of interest to any company that does or is considering doing business in Brazil, which is now the sixth-largest economy in the world.
- Suspensory Regime. Under the Act, parties cannot close a reportable transaction until CADE reviews and approves the transaction. Previously, merging parties were not required to observe a waiting period before closing the underlying transaction. Under the new suspensory regime, companies seeking to engage in specified “concentration acts,” such as mergers and acquisitions, must notify CADE of their intent and wait for CADE’s approval for such transactions to be finalized. The prohibition on closing a reportable transaction until the government has been notified and a waiting period observed is akin to the process in the United States under the Hart-Scott-Rodino Antitrust Improvements Act. The new Brazilian law imposes substantial penalties on parties that close a deal without obtaining clearance, including fines ranging from R$60,000 to R$60 million (approximately US$30,000 to US$30 million) or even requiring the parties to unwind the transaction.
- Notification Thresholds. Brazil’s new law also contains revised jurisdictional thresholds. There are two tests that determine whether a transaction is reportable under the new Act: (1) the corporate group of one party to the transaction achieved at least R$750 million (approximately US$367 million) in gross revenue in Brazil in the last calendar year, and (2) the corporate group of another party to the transaction achieved at least R$75 million (approximately US$37 million) in gross revenue in Brazil in the last calendar year. By requiring at least two parties to have substantial financial turnover in Brazil, the new filing thresholds only apply to companies that have significant connections to Brazil. But, the threshold calculations include the revenues of the entire economic group (not just the turnover of the target or acquiring company), so parties engaged in a foreign-to-foreign transaction may still meet the thresholds.2
- Review Period. The new law allows CADE up to 240 days to review a proposed transaction. The review period can be extended under certain circumstances, allowing CADE up to 330 days to issue a final administrative decision. If CADE has not made a decision by the end of the relevant review period, a transaction will be deemed approved. Although there is a “fast-track” procedure for transactions that meet certain requirements, there are no guarantees of expedited clearance. CADE has suggested that it expects to clear “fast-track” deals within 40 days of notification.
- Detailed Notification Forms. Finally, under the new Act, CADE will accept two filing forms: a short form form for “non-complex” transactions, or a regular form for “complex” transactions, depending on the nature of the proposed deal. Both forms require substantial amounts of information compared to similar forms in other major jurisdictions.
Practical Implications of Brazil’s New Law
Since transactions meeting the new Act’s thresholds must await clearance before closing, companies that do business in Brazil that are contemplating an acquisition need to consider:
- Is a Filing Required? At an early stage, companies need to understand whether the transaction satisfies the new threshold. A required Brazilian notification and CADE clearance can have a substantial impact on the timing of a transaction’s closing.
- Fast-Track Procedures. The parties need to analyze whether they can take advantage of the new fast-track procedures. The benefits of these procedures are two-fold: (1) they provide for faster review of the transaction, and (2) the parties can make a short form notification, which requires less detailed information than the regular form.
- Deal Terms. Ensure the proper covenants and warranties are included in the deal agreement. Parties do not want to negotiate a deal agreement that requires the parties to close in violation of the new Act.
- Filing Preparations. Parties should work together to compile the information needed to complete the filing. Normally, the filing should be made only after there is a binding agreement between the parties.
- Temper Expectations. The review period does not start until CADE deems a notification completed, and because no regulation or precedent has yet been issued regarding a shorter first-phase review period, there is significant timing uncertainty under the new law. Thus, companies involved in a transaction that requires clearance should be prepared to wait up to 330 days to receive it.
- Observe CADE’s Actions. CADE and its officials are continuing to issue interpretations of the new law and its regulations, so additional time will help clarify how the specific details and procedures of the new regime are being implemented.